Baidu slashes revenue forecast as government probes its medical advertising business

Baidu, China’s dominant search company, has lowered its revenue expectation for its current quarter of business by around 10 percent following a scandal around its medical industry advertising partners.

Chinese authorities opened an investigation into the company earlier this month after it emerged that a 21-year-old student who died of cancer had borrowed over $30,000 to finance an unsuccessful treatment that he found advertised on Baidu’s search engine. It is unclear if the medical treatment was misleading, but Baidu was criticized by many in China — including state-run media People’s Daily — for making money from health cases.

Beyond creating negative headlines, the controversy has weighed on Baidu’s business. The firm said today that it has reduced its estimated revenue range for Q2 2016 to RMB18.100 billion ($2.807 billion) to RMB18.200 billion ($2.823 billion) from an original target of RMB20.110 billion ($3.119 billion) to RMB20.580 billion ($3.192 billion).

That adjustment is due to lower interest from advertisers during the government review of its search engine, which is estimated to have more than 80 percent marketshare in China.

“While the review is underway, the Company has observed a reduction or delay in spend from a significant portion of medical customers,” Baidu said. “These customers may be in the process of receiving instruction from regulatory authorities, gathering and submitting required documentation and adjusting their practices to comply with new regulations.”

Baidu expects its business to rebound over time but, for now, it has also lowered the number of sponsored links that appear within the search engine.

“This measure impacts revenue over the short term but enhances user experience and will drive benefit to Baidu over the long term,” it added in a note to investors.

Baidu chairman and CEO Robin Li echoed that sentiment in a longer statement:

Baidu provides a strong, unique value proposition to its users and customers by helping users find whatever it is they are looking for, and connecting online marketers with those users. This role comes with great social responsibility and user experience is our top priority.

Although a significant portion of our revenue is sacrificed, the steps we have taken to further bolster a healthy, safe and trustworthy online and offline ecosystem will result in long term benefit and reward for Baidu.

Nasdaq-listed Baidu’s share price fell as low as $150.50 in after-hours trading after closing at $163.55 at the end of trading on Monday. It since recovered to $154.75 at the time of writing.